U.S. government seeks to cut Medicare payments to insurers

A pharmacy employee looks for medication as she works to fill a prescription while working at a pharmacy in New York December 23, 2009.

Reuters/Lucas Jackson

(Reuters) - The U.S. government on Friday proposed a cut in payments to private health insurers for 2015 Medicare Advantage plans, a move Republican lawmakers said would hurt benefits for the elderly and disabled.

The proposal, released in a document by a division of the U.S. Department of Health and Human Services, appeared to cut payments by more than the 6 to 7 percent the insurance industry had expected, one Wall Street analyst said.

"Now the lobbying begins: can the plans get Congress to help make the cut less severe?" CRT Capital analyst Sheryl Skolnick said, adding that her assessment of the hundreds of pages of information was preliminary.

Friday's notice of proposed rates opens a window for negotiations on the final ruling, due April 7.

Insurers and lawmakers have said cuts will mean smaller networks of doctors and hospitals and higher out-of-pocket costs. Insurers have said they could only maintain benefits if there was no change in payments for 2015 from 2014.

Many factors go into determining the government's total reimbursement to insurers. These payments are based in part on the assumption that Medicare Advantage spending per person will fall 3.55 percent in 2015. Total reimbursement to insurers, however, is influenced by factors such as payments for patients who are sicker than average.

An executive at one company that manages Medicare Advantage plans said that insurers are facing cuts in the 8 percent to 10 percent range when factoring in the per capita spending decline and other planned reductions. These include a new health insurance tax under President Barack Obama's healthcare law as well as other risk adjustments.

Other industry officials said they were still reviewing the Medicare notice to determine its full impact. Republican lawmakers said any additional cuts to the program were unacceptable.

"These Medicare Advantage cuts are misguided, threaten a successful program for seniors, and must be overturned," Republican Senator Orrin Hatch said in a statement.

"Medicare Advantage is extremely popular for a reason - run through the private market, seniors gain access to high-quality and coordinated care with additional benefits that they otherwise wouldn't get," he said.

The criticism from Hatch and other leading Republicans adds to pressure from the party over Obama's signature domestic policy achievement. The Patient Protection and Affordable Care Act, which aims to extend health coverage to millions of uninsured Americans, includes provisions to cut Medicare spending.

UnitedHealth Group Inc, Humana Inc and Aetna Inc are among the insurers who manage private Medicare plans for about 15 million of the 50 million Americans eligible for Medicare.

The shares of insurers fell in after-hours trading. Humana posted the biggest loss with a 4 percent decline.

PLANNING FOR 2015

The proposed payment rates are a key factor in how insurance companies plan their business for the coming year, including in which markets they will offer health plans, what their medical and administrative costs will be and at what level to set premiums and doctor visit co-payments.

Insurers have said that 2014 was a difficult year for Medicare Advantage because of cuts to payments estimated at about 6 percent overall by the industry group, called America's Health Insurance Plans (AHIP).

The Centers for Medicare and Medicaid Services said in a statement that the proposed changes for 2015 are smaller than those implemented in 2014.

It also said in the statement that it planned to calculate risk scores in 2015 with the same methodology as in 2014. It said it would change a part of its risk payment formula to account for the increasing proportion of baby boomers entering Medicare, who tend to have better health.

It was not immediately clear how these and other formula changes in the document would affect the industry overall or specific insurers.

Medicare Advantage and other government paid-healthcare services like Medicaid are among the insurers' fastest growing businesses.

But if the costs to insurers of providing the healthcare services outpace the payments from the government, the difference is paid by the insurers, undermining their ability to profit from these plans.

"Medicare Advantage plans are fully at risk under this program. So if their estimate is off, for better or for worse, they are at risk for that," said Anne Hance, a lawyer at McDermott Will & Emery in Washington, D.C. who focuses on regulation.